Do you happy with an increasing interest rate?. As a depositor, we enjoy to get a more interest income. However, banks may not like if an interest rate increase. In the article "Banks' next big problem appears on the horizon" in The Economist show that bank dislink an increasing interest rate.
The article tells that the surprise increase in the Fed’s discount rate for emergency loans to banks on February 18th, from 0.5% to 0.75%, cause a higher risk on banks because banks' profit come from borrowing cheap and investing on high yield assets. When interest increase,the funding cost raising. Reckons CreditSights said that "A 0.5 percentage-point rise in rates would cost Citigroup $771m in annual net interest income".
I think, it is a function of banks that they should manage thieir own risk. This is because, they enjoy a large profit from an interest. There is no free-lunch on the world. If you want a profit, it is unavoidable to take risk.
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References
Banks’ next big problem appears on the horizon. (2010, February 25). The Economist. Retrieved March 4, 2010 from http://www.economist.com/business-finance/displaystory.cfm?story_id=15580138
Thursday 4 March 2010
2 comments:
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Earth, thank you for the interesting post.
ReplyDeleteWhen you wrote that you "think, it is a function of banks that they should manage thieir own risk." Does that mean that you think the US and other states were wrong to interfere to provide emergency assistance to banks a couple of years ago?
Do you think that governments should let badly managed banks fail, and all their customers to lose their money?
I have to admit, had Earth not blogged this aricle, it's probably one of the ones I would not have read.
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